I haven't tried that option, but in general, remastering means creating a new compressed image, while overlays are stacked compressed file system modifications relative to the rest of the stack.
So if you have a series of overlays, you might consider a remastering to collapse that stack and get better efficiency.

Thanks for your reply Capricorny. That is how I understand it as well.

However, at install time, whether you choose to Remaster or not, it still creates KNOPPIX2 as a stacked compressed file system and, as far as I know, there is no option (script?) in Knoppix to generate a remastered image. There was once a script by Werner P. Schulz to create a remastered image but now the website does not exist any more. It would be great if such script are integrated in the Live DVD since it would make remastering much easier.

What is going on, I think, is that a slightly more "advanced" form of remastering is done, where the cloop images are created subject to the 4GB filesize constraint. The overlays are collapsed, but two non-overlapping images are created. If your files are to reside on less restricted file systems, you don't need to care about that - unless there is some limits in cloop file creation. I mostly use a "knoppified" version of plain Debian now, and there squashfs is used. But the principle for remastering is exactly the same.
I think you should not let the lack of updated scripts stop you. There are several code snippets posted here through the years to work from.

Now I have tried the "remaster" option, and it seems to me that the new overlay KNOPPIX2 is simply created on top of KNOPPIX and KNOPPIX1. Which may seem like a nuisance if you have purged a lot of packages to make room for new programs, but isn't really too bad for most ordinary use cases. I use both standard Debian (live) and Knoppix, and while I will stick to the ordinary remastering procedure for Debian, I think this "shallow" remastering will suffice for my Knoppix use.
One of the real handy features of frequent remastering, is that the system may often be run without persistent store, which means, among other things, that errors or malware that is introduced will not survive the next reboot.